Transplanting Taxes from Corporations to the Rest of Us

American taxpayers are increasingly picking up the tab for unpaid corporate taxes.

— by Scott Klinger

Scott Klinger

Today, corporate profits are setting all-time records while middle class families continue to struggle financially. These trends are intertwined.

Whether you’ve clicked to send your tax forms to the IRS along the cyber-highway or dropped your return in the old-fashioned blue mailbox, you’ll be paying extra to cover the growing amount of taxes that the nation’s clever corporations are shunting onto individual taxpayers.

Officially, the U.S. corporate tax rate stands at 35 percent, but in practice it’s far lower. Corporations have lots of tricks in their box of tax-avoidance tools.

Consider Pfizer’s track record. The drugmaker increased its offshore profits by $10 billion in 2012, boosting its offshore stash to $73 billion — all of it untaxed by Uncle Sam. Like most pharmaceutical companies, Pfizer registers its patents in a low-tax offshore haven, and then charges a high price for the use of this “intellectual property.” Doing so, it shifts all of its U.S. profits offshore, avoiding U.S. taxes and bloating its overseas bank account.

Pfizer’s tax dodging prowess has earned it a gold medal in the sport, but it has also drawn unwanted attention from the Securities and Exchange Commission. The SEC wrote to Pfizer last year asking them to explain four years of large losses in their U.S. operations despite reporting about 40 percent of their sales on American soil. Undeterred by the SEC investigation, Pfizer added a fifth year of U.S. losses to the string in 2012.

Imagine for a moment one of the physicians that prescribes Pfizer’s products taking their diploma off their office wall, carefully packing it up, and shipping it to a bank vault in the Cayman Islands. That diploma represents the doctor’s intellectual property. Without it, they would not be able to practice their profession.

After each visit, patients approaching the check-out desk would be given their bill and an envelope to mail their check to a post office box in the Cayman Islands. Faced with confused looks, the receptionist cheerfully explains, “Well, we have to pay for the use of the skills represented by the diploma, which is housed in the Caribbean.”

The corporate offshore tax dodge that shifts $90 billion of tax expenses onto individual taxpayers this Tax Day is just that crazy. Just like having a doctor’s diploma parked in the Cayman Islands does nothing to improve the quality of care, having corporate profits transferred from America to tax haven nations provides no enhanced benefits in terms of product quality or service. In other words, there is no economic value. It only serves to add more to already-overflowing corporate coffers.

Taxing Economics, an OtherWords cartoon by Khalil Bendib

Taxing Economics: Tax havens put the corporate cart before the individual horse by Khalil Bendib

In the 1950s, corporations paid nearly a third of the federal government’s bills. Last year, thanks to the antics of Pfizer and other examples of overly creative accounting, corporate income taxes accounted for less than a tenth of Uncle Sam’s total revenue. This dramatic shortfall shows up in two ways — federal budget deficit growth and the growing trend of individual taxpayers paying an increased share of the costs of government.

Only about two in every thousand American businesses are even eligible to play this game, and far fewer actually do. Most business owners are proud to pay taxes they know support schools, good infrastructure, and national security.

If tax-dodging corporations were people, they might say thanks to the responsible taxpayers who are picking up their share of unpaid taxes. But since they aren’t human, allow me to say on their behalf, “Have a Nice Tax Day.”

Scott Klinger is an Associate Fellow of the Institute for Policy Studies.  Distributed via OtherWords. OtherWords.org

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The Capital of Inequality

The Washington region’s increasingly rich elite are now zipping along in Lexus lanes.

By Sam Pizzigati

Sam Pizzigati

Politicians inside the Beltway that circles Washington, D.C., most of us would agree, don’t understand the challenges of daily life that average Americans face outside the Beltway.

But these days, if you really want to understand everyday life in our deeply unequal society, the best place to look may now be on the Beltway.

The highway officials who run the Beltway’s stretch that winds through Northern Virginia have just opened up the nation’s latest set of “Lexus lanes.” For a stiff fee, affluent motorists can now zip around the Beltway in “express toll lanes” while less affluent fellow motorists sit stalled in rush-hour traffic jams.

And those fellow motorists do a lot of stalling. The Washington region has more traffic congestion than any other major U.S. metro area. In 2010, commuters in the D.C. area lost an incredible 74 hours to traffic jams, up from just 20 hours in 1982.

Something else fundamental — besides traffic — has changed around Washington. The area has become substantially more unequal.

The national capital region used to be a middle class haven, a place where average federal employees, The Washington Post recalls, could take home “modest but steady paychecks.”

But the federal government has been outsourcing federal jobs, over recent decades, to private contractors. For average workers, this change has meant less secure employment and smaller paychecks. For Washington’s “growing upper class of federal contractors, lobbyists, and lawyers,” notes a recent Reuters analysis, this switch has brought a steady gusher of windfalls.

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Two decades ago, a family had to make $368,000, in today’s dollars, to enter the Washington area’s most affluent 1 percent. Top 1 percent status today doesn’t kick in until $527,000. In 2011, the top 5 percent of D.C. area households took home 54 times more income than the bottom 20 percent. No state in the entire nation has a wider top-to-bottom gap.

Economists see powerful links between levels of inequality this high and traffic congestion. In deeply unequal regions, the wealthy bid up the price of the choicest real estate, and that forces cash-squeezed middle class families to move further out to find decent housing.

The further away people live from their work, the more traffic on the roads. Those American counties where commuting times have increased the most, Cornell economist Robert Frank points out, just happen to be those counties “with the largest increases in inequality.”

How should we respond to all this congested commuting? Americans have traditionally battled traffic jams by building new roads with the dollars that come from gas taxes. But state gas taxes in the United States, on average, haven’t increased in a decade. Overall government spending for infrastructure, meanwhile, has been dropping, from 3.3 percent of the nation’s gross domestic product in 1968 to 1.3 percent in 2011. This long-term decline began at almost exactly the same time as the level of inequality in the United States started rising.

Researchers see no coincidence here. The states where the rich have gained the most at the expense of the middle class turn out to be the states that invest the least in infrastructure.

Enter “Lexus lanes.” These “dynamically priced” roadways solve the problem of traffic congestion — but only for the affluent. If too many people start using a Lexus lane and traffic slows, the tolls rise — and keep rising until the car volume drops enough to get traffic moving again.

Toll fees on Washington’s new Lexus lanes have no cap. In really bad traffic, officials acknowledge, tolls might jump to $1.25 per mile.

That’s no problem for the affluent. They get speedy, tension-free commutes — at a cost they find negligible.

The rest of us do get something out of the Lexus Lane deal. We get confirmation, as we sit and stew in horrific traffic, that inequality as deep as ours simply makes no sense.


OtherWords
columnist Sam Pizzigati is an Institute for Policy Studies associate fellow. His latest book is The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class. OtherWords.org

In Fact, Fairly Taxing the Rich Won’t Scare Them Away

Recent research debunks some of the most common arguments against raising taxes on the richest Americans.

— by Sam Pizzigati

Sam Pizzigati

Why do so many lawmakers in Congress oppose raising taxes on America’s wealthy, even just a little? The answer: We’ll never really know for sure.

Lawmakers might oppose tax hikes on the wealthy, for instance, because their rich campaign contributors don’t want to pay higher taxes. Or they might oppose bigger tax bills for millionaires simply because they don’t want to pay Uncle Sam a cent more of their own high-dollar incomes.

Lawmakers under the influence of either of these motives would, of course, never openly admit to them. How could they — and still survive politically? Simple political reality demands that wealth-friendly lawmakers must solemnly proffer much more noble rationales for why they want to shield rich people’s income from higher taxes.

Raising taxes on high incomes, we’ve been assured since long before the current budget-balancing debate, will discourage small business “job creators.” Higher taxes on the rich, we’re also told, always backfire and never generate the revenue anticipated.

Do these claims match up with facts on the ground? Northwestern University’s Institute for Policy Research earlier this month hosted a congressional briefing that sought to sort out those facts.

TaxTheRichThe briefing — titled Taxing the Wealthy: What Does the Research Show? — brought top academic tax analysts to Capitol Hill. The analysts had a good many facts to share, to the distinct unease of the apologists for the affluent who stopped by.

What do the facts tell us about those small business “job creators” who’ll suffer so, as friends of the fortunate claim, if tax rates on high incomes rise? The facts don’t show much potential suffering.

Just under 70 percent of American taxpayers making over $1 million a year, U.S. Treasury Department figures show, do indeed report small business income on their tax returns. But these millionaires who do report small business income average only around 5 percent of their income from small business operations.

In other words, we’re talking investment bankers with hobby ranches in Montana. The vast majority of taxpayers making more than $1 million a year aren’t small business folks creating good jobs in their own local communities.

But won’t those investment bankers just flee to lower-tax pastures if Congress opts to hike the tax rates on their incomes? Won’t that exodus just negate the revenue boost that raising taxes on the rich is supposed to create?

Charles Varner, a fellow at Stanford University’s Center for the Study of Poverty and Inequality, has been researching what typically happens when governments raise taxes on taxpayers of major means.

Varner and his colleagues looked closely at tax receipts in New Jersey and California after these two states enacted new “millionaire’s taxes” in 2004 and 2005. In California, the top tax rate rose from 9.3 to 10.3 percent. After the increase, out-migration of high-income Californians actually fell.

But California, skeptics might argue, occupies a great deal of territory. A deep pocket upset about a tax hike has to travel a good bit to leave California.

True enough, but deep pockets in New Jersey operate in a totally different environment. A New Jersey millionaire who works on Wall Street could easily have chosen to move into lower-tax New York State or Connecticut after New Jersey’s millionaire’s tax went into effect. A New Jersey millionaire working in Philadelphia could have chosen to relocate in lower-tax Pennsylvania.

But these New Jersey millionaires, in real life, opted overwhelmingly to stay put. Researchers, Stanford’s Varney explained at Northwestern University’s congressional briefing, have found similar patterns in Canada between provinces with different tax rates and in Switzerland between cantons.

None of this surprises Varney. Moving costs money, he notes. Relocating your stuff costs a lot, and few of us can pick up stakes and move without disrupting our networks of friends and clients.

Varney’s basic point: “Economies of place,” as he explains, remain “significant even for people at the top of the income distribution.”


OtherWords columnist Sam Pizzigati is an Institute for Policy Studies associate fellow. His latest book is The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class. OtherWords.org

What ‘Grand Bargainers’ Simpson and Bowles Really Stand For

By  | November 28, 2012 | Originally Published on Campaign for America’s Future Blog

There has been a lot of discussion about Congress enacting a “grand bargain” during the lame duck session of Congress.  Many members of Congress have talked about using the plan put forward by Alan Simpson and Erskine Bowles as an outline for a “balanced” approach to deficit reduction.

Let me take this opportunity to tell you a little about Alan Simpson and Erskine Bowles and what their plan would do.

As many of you know, Alan Simpson is a former conservative Republican Senator from Wyoming who has wanted to cut Social Security benefits for decades.

Here are just a few of the rude, inaccurate, and derogatory statements that Alan Simpson has made about Social Security:

  • On August 24, 2010, Alan Simpson wrote in an e-mail to the head of the Older Women’s League: “And yes, I’ve made some plenty smart cracks about people on Social Security who milk it to the last degree. You know ‘em too. It’s the same with any system in America. We’ve reached a point now where it’s like a milk cow with 310 million tits!  Call when you get honest work!”
  • On Friday, May 6, 2011, Alan Simpson told the Investment Company Institute, that Social Security is a “Ponzi scheme”, “not a retirement program.”  Simpson went on to say that Social Security “was never intended as a retirement program. It was set up in ‘37 and ‘38 to take care of people who were in distress — ditch diggers, wage earners — it was to give them 43 percent of the replacement rate of their wages. The [life expectancy] was 63. That’s why they set retirement age at 65.”
  • On June 19, 2010, Alan Simpson said: “Social Security was never a retirement. It was set up to take care of poor guys in the depression who lost their butts who were getting butchered.”

Erskine Bowles has been a board member of Morgan Stanley since 2005 and made a fortune as a Wall Street investment banker as many of you know.

However, you may not know that Erskine Bowles made the following statement in 2011 at the University of North Carolina: “Paul Ryan is honest, he is straightforward, he is sincere. And the budget that he came forward with is just like Paul Ryan. It is a sensible, straightforward, honest, serious budget and it cut the budget deficit just like we did, by $4 trillion.”

You may also be unaware that Erskine Bowles and Alan Simpson endorsed Congressman Charles Bass (R-NH) against progressive Democrat Ann McClane Kuster.

In their endorsement of Rep. Bass, Bowles and Simpson wrote: “Charlie supported a plan that demonstrated it is possible to raise revenues for deficit reduction through pro-growth tax reforms that reduce tax rates for individuals and businesses.  Likewise, it is possible to reform entitlement programs … He is a brave leader who deserves the thanks of everyone who really cares about our nation’s future.”

Rep. Bass voted for the Paul Ryan budget that every Democrat in the Senate has voted against.  In contrast, Kuster, who went on to defeat Rep. Bass, has said: “Let me be clear: I will never cut Social Security and Medicare benefits. My Tea Party opponent will.”

Even more distressing, in my opinion, is the belief that the Simpson-Bowles plan is a “balanced approach” to deficit reduction that we should be using as a model.

Here are the major elements of the Simpson-Bowles plan that I believe the Democratic Caucus should strongly oppose:

  1. Cutting Social Security benefits for current retirees.  The Simpson-Bowles plan would reduce Social Security benefits for current retirees by using a “chained-CPI” to determine cost-of-living-adjustments (COLAs).  According to the Social Security Administration, enacting a chained CPI would cut Social Security benefits by $112 billion over 10 years meaning that the average Social Security recipient who retires at age 65 would get $560 less a year at age 75 and would get $1,000 less a year at age 85 than under current law.

    Two-thirds of senior citizens rely on Social Security for more than half of their income, and the average Social Security benefit today is about $1,200 a month.  At a time when seniors haven’t received a Social Security COLA in two out of the last three years as the price of prescription drugs and healthcare have gone up, the Simpson-Bowles plan would make it harder for today’s average senior citizen to make ends meet.

  2. Cutting veterans’ benefits.   Not only would enacting a chained-CPI be harmful to senior citizens, it would also make substantial cuts to the VA benefits of more than 3 million veterans.  The largest cuts in benefits would impact young, permanently disabled veterans who were seriously wounded in combat.  According to the Social Security Administration, permanently disabled veterans who started receiving VA disability benefits at age 30 would see their benefits cut by more than $1,300 a year at age 45; $1,800 a year at age 55; and $2,260 a year at age 65.  That would be simply unacceptable.
  3. Raising the retirement age to 69 years.  Increasing the retirement age to 69 would reduce lifetime Social Security benefits for workers by about 13 percent.  This would be particularly harmful to construction workers, nurses, factory workers and other labor intensive jobs.  According to the Center for Economic Policy and Research, 45 percent of workers who are 58 years of age and older work in physically demanding jobs or jobs with difficult working conditions.  Moreover, older Americans have a higher rate of long-term unemployment than any other age group.
  4. Cutting Social Security benefits for middle class workers.  According to the Social Security Administration, all of the Social Security policy changes in Bowles-Simpson would cut average annual Social Security benefits for middle-income workers (with average annual lifetime earnings of between $43,000 and $69,000) by up to 35 percent.
  5. Reducing tax rates for the wealthy and large corporations.  The Simpson-Bowles plan would significantly reduce income tax rates for the wealthiest Americans and largest corporations to between 23 and 29 percent — even lower than the top rate of 35% under the Bush tax cuts.    Simpson and Bowles claim that some $1.2 trillion in revenue would be increased under their proposal by eliminating or reducing tax expenditures, such as the mortgage interest deduction, and the tax exclusion on employer health insurance and pension plans.  However, a March 22, 2012 Congressional Research Service report has suggested that federal income tax rates could be reduced by no more than two percentage points under a realistic scenario of reducing tax expenditures in order to be deficit neutral, and could not reduce the deficit.

    The President and almost all Democrats have supported repealing the Bush tax breaks for the top two percent.  That means that the top individual income tax rate would be increased from 35 percent to 39.6 percent – the same level under President Clinton when over 22 million new jobs were created.  We should eliminate corporate tax loopholes and tax breaks for the wealthy — and use this revenue to reduce the deficit and create jobs, not to lower tax rates.

Other harmful provisions in the Simpson-Bowles plan include:

  • Increasing the regressive gas tax by 15 cents starting next year;
  • Increasing premiums for Medicare, Medicaid, and the Children’s Health Insurance Program;
  • Increasing interest rates on student loans;
  • Increasing co-payments for middle class veterans receiving health care through the VA;
  • Cutting 450,000 jobs in the federal workforce and private companies under contract with the federal government;
  • Eliminating or limiting the exclusion of taxation on employer provided health insurance and pensions;
  • Encouraging companies to ship jobs to China and other low wage countries by adopting a “territorial” tax system allowing corporations to evade U.S. income taxes by establishing subsidiaries overseas;
  • Increasing taxes on low-income workers making between $10,000 to $20,000 a year by 14.5% in 2021 by moving to a chained-CPI; and
  • Reducing the number of Americans eligible for Medicaid, SSI, the Children’s Health Insurance Program, WIC, Head Start, LIHEAP, the Earned Income Tax Credit, the Refundable Child Credit, and the Savers’ credit by shifting to a chained-CPI.

Those are the major elements of the Simpson-Bowles plan.  If enacted, they will cause major economic pain to virtually every American, while lowering tax rates for millionaires, billionaires and large corporations even more than President Bush.

For all of these reasons, I hope you will join me in opposing the Simpson-Bowles approach to deficit reduction.


Bernie Sanders is an independent U.S. senator from Vermont. This was written as a “Dear Colleague” letter to members of the U.S. Senate and was published on the Campaign for America’s Future Blog

To Move Forward, We Must Learn from Our Progressive Past

Yesterday’s ideas about curbing the ultra-rich’s power remain just as relevant as ever.

By Sam Pizzigati

Sam Pizzigati

Our contemporary billionaires, most Americans would agree, are exploiting our labor and polluting our politics. Can we shrink our super rich down to a less powerful — and more democratic — size? Of course we can. We Americans, after all, have already done that before.

Between 1900 and the 1950s, average Americans beat down plutocrats every bit as dominant as ours. A century that began with huge private fortunes and most Americans living in poverty would come to see sweeping suburban developments where grand estates and mansions once stood.

Most of us today, unfortunately, have no inkling that this huge transformation even took place, mainly because that exuberantly middle class America of the mid-20th century has disappeared. Those grand mansions have come back.

Does this super-rich resurgence make failures out of our progressive forebears, the men and women who fought to limit the wealth and power of America’s wealthiest? Our forebears didn’t fail, as I explain in my new book. They just didn’t go far enough.

In The Rich Dont Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, I sum up the incredible feats those progressives accomplished. They "soaked the rich" at tax time. They built a union movement that acted as a real check on corporate greed. They even tamed Wall Street.

But these great victories have long since faded. How can we get back on a plutocracy-busting track? We could start by revisiting those struggles of years past that came up short, those proposals that, had they become law, might have lastingly leveled down our super rich.

The Rich Don’t Always Win explores many of these proposals. Here are three.

One: Require the rich to annually disclose how much they actually pay in taxes.

The Rich Don't Always Win, by Sam Pizzigati
Eighty years ago, just like today, America’s rich evaded taxes massively. If wealthy taxpayers knew their returns would be open to public inspection, reformers argued, they might think twice about this evasion.

In 1934, progressives actually added a disclosure requirement to the tax code. But Congress, after a swift super-rich counterattack, repealed it. Even so, the basic idea behind disclosure remains as powerful as ever. Just ask Mitt Romney.

Two: Leverage the power of the public purse against excessive CEO pay. Congress can’t directly set limits on corporate compensation, and yesterday’s progressives understood that. But Congress could impose limits indirectly by denying federal government contracts to firms that overpay their top executives.

In 1933, then-senator and later Supreme Court justice Hugo Black won congressional approval for legislation that denied federal airmail contracts to companies that paid their execs over $17,500, about $300,000 today.

The New Deal never fully embraced Black’s perspective. We could now, by denying federal contracts to any companies that pay their CEOs over 25 times what their workers are making.

Three: Cap income at America’s economic summit. In 1942, President Franklin Roosevelt proposed a 100 percent tax on individual income over $25,000. That would amount to $355,000 in today’s dollars.

Congress balked. But lawmakers did set the top tax rate at 94 percent on income over $200,000, and top federal rates hovered around 90 percent for the next two decades, years of unprecedented middle class prosperity.

America’s rich fought relentlessly to curb those rates. They saw no other way to hang on to more of their income. But what if we restructured the top tax rate of America’s postwar years to give the rich a new incentive?

We could, for instance, tie the threshold for a new 90 percent top tax bracket to our nation’s minimum wage. The higher the minimum wage, the higher the threshold, the lighter the total tax bite on the nation’s highest incomes.

Our nation’s wealthiest, under this approach, would suddenly have a vested interest in enhancing the well-being of our poorest. Years ago, progressives yearned to create an America that encouraged just that sort of social solidarity. They couldn’t finish the job. We still can.

OtherWords columnist Sam Pizzigati is an Institute for Policy Studies associate fellow. His latest book is The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class. OtherWords.org